FPIs are buying again. Why is their share of Indian stocks still falling?

Foreign investors’ ownership of Indian equities has fallen to its lowest level in nearly 15 years amid valuation concerns, geopolitical uncertainty, and elevated US bond yields, even as they returned to the market as net buyers in the September quarter.

A Mint analysis of 5,638 BSE-listed companies sourced from the CMIE database showed that foreign portfolio investors (FPIs) held 14.02% of shares at the end of the September quarter (Q2FY27), their lowest since December 2011. Their ownership fell nearly 0.4 percentage points sequentially and 154 basis points over the past year. It is now 6.07 percentage points below its December 2020 peak of 20.09%, reflecting a sustained retreat by overseas investors.

FPIs, however, turned net buyers during the September quarter, net investing ₹13,970 crore. They had pulled out ₹1.43 trillion in the June quarter and ₹1.31 trillion in the March quarter. Their net outflows for 2026 so far stand at ₹2.9 trillion.

FPIs had withdrawn ₹76,619 crore in the September quarter of 2025. Net outflows for the first nine months of 2025 were at ₹1.5 trillion.

In the final week of October, FPIs bought stocks worth more than ₹14,000 crore. However, they remained net sellers for the month, pulling out ₹34,843 crore, as per NSDL data.

Mayur Shah, head of PMS and fund manager at Anand Rathi Advisors, attributed the decline in foreign holdings at the end of the September quarter to higher US bond yields, a relatively strong dollar, geopolitical uncertainty and concerns over Indian valuations. Earnings growth has not always kept pace with elevated valuations, particularly in largecaps, while other emerging markets offer competing opportunities.

The valuation gap remains stark. The MSCI India index trades at 16.59 times one-year forward earnings, more than twice the 7.54 times multiple for MSCI Emerging Markets and well above the 9.43 times for MSCI AC Asia Pacific.

Early earnings data, meanwhile, suggests that corporate performance has remained robust. The 188 companies that have so far announced their September quarter results reported an aggregate revenue growth of 21.64% year-on-year, with net profit up 22.43%.

Domestic cushion

As foreign ownership receded, domestic mutual funds expanded their shareholding to a new high. Their ownership rose to 11.59% in September from 11.50% in June and 10.79% a year earlier.

The gap between foreign portfolio and mutual fund ownership narrowed to 2.43 percentage points, from 4.77 percentage points a year earlier, according to CMIE data.

Domestic institutional investors (DIIs) invested a net ₹1.7 trillion in Indian equities during the September quarter, compared with net inflows of ₹13,970 crore from FPIs. The divergence underscores the growing role of domestic capital in absorbing foreign selling and supporting the market.

Strong domestic institutional participation has helped absorb foreign selling, said Vishad Turakhia, chief executive officer of Equirus Securities. But that support does not resolve the concerns keeping overseas investors cautious.

A fall in stock prices alone may not be enough to bring them back. Foreign investors also want earnings upgrades, improved returns on capital and evidence that India’s valuation premium over other markets is justified, he added.

Shah said lower US rates could improve global liquidity and encourage investment in the emerging markets. Sustained inflows into India, however, would also require more reasonable valuations and greater confidence in corporate earnings.

“In our view, a combination of supportive global liquidity and stronger domestic earnings fundamentals will be essential for a durable revival in foreign investor participation,” he said.

Largecaps under pressure

The decline in foreign ownership was more pronounced among largecaps. Mint analysis of 100 largecap companies showed that FPIs reduced their stakes in 57% of them sequentially in the September quarter, increased their holdings in 42% and left them unchanged in the remaining 1%.

Their size and liquidity make these companies a natural source of funds when foreign investors cut exposure. Largecaps account for a substantial share of overseas portfolios and are easier to sell when funds rebalance, reduce emerging market allocations or meet redemptions, said Turakhia of Equirus.

“The issue is not necessarily a loss of confidence in India’s long-term growth story. Rather, foreign investors are becoming more selective about the price they are willing to pay for that growth,” he said.

Meanwhile, domestic mutual funds increased their stakes in 55% of large-cap companies sequentially in the September quarter and reduced in 43%. Retail investors—individual shareholders holding nominal share capital of up to ₹1 lakh—increased their holdings in 47% of largecaps, reduced them in 52% and left them unchanged in the remaining 1%.

The picture was more balanced among BSE-listed midcaps. Of the 147 companies analyzed, foreign holdings rose in 49% during the September quarter and declined in 45.6%, making this the only segment where increases outnumbered reductions. Holdings remained unchanged in the remaining 5.4%.

Mutual funds raised their stakes in 54.4% of midcaps and reduced them in 43.5%. Retail investors increased their holdings in 41% and cut them in 57%.

Data showed that largecap funds recorded net outflows of ₹1,609.58 crore in the September quarter, while midcap and smallcap funds attracted net inflows of ₹21,016.55 crore and ₹24,779.40 crore, respectively

Among the 3,920 BSE-listed smallcaps analyzed, foreign holdings fell in 22.8% of companies during the September quarter and rose in 20.4%, while remaining unchanged in 56.8%.

Mutual funds increased and reduced their stakes in about 10.3% of companies each, with holdings unchanged in roughly 79%. Retail investors cut their stakes in nearly 50% of smallcaps and raised in 43% of the companies.

The ownership trends played out against divergent market performance. During the September quarter, the BSE largecap index fell 3.46% and the midcap index declined 2.15%, while the smallcap index gained 8.51%.